Key Takeaways

  • Product licensing allows inventors or businesses to authorize another party to manufacture and sell their product in exchange for royalties.
  • It is an efficient way to bring a product to market without launching a business from scratch.
  • Understanding the roles of licensors and licensees is critical to creating a successful partnership.
  • A strong licensing agreement should cover rights, royalties, duration, and termination terms.
  • Licensing is beneficial when you lack resources for production or distribution but can also come with trade-offs like loss of control.
  • Licensing professionals, like attorneys, can help negotiate favorable terms and avoid costly mistakes.

What Is Product Licensing?

Product licensing is a streamlined way to turn an idea into a product that's ready for sale. Here's how to license a product:

  • Come up with a great idea.
  • Protect your intellectual property through the United States Patent and Trademark Office (USPTO).
  • License a company to manufacture and distribute your product.
  • Collect royalties.

Types of Product Licensing

There are several types of product licensing arrangements, each suited to different needs and industries:

  • Exclusive License: Grants one licensee the sole right to produce and sell the product. This often comes with higher royalty rates but more risk if the licensee underperforms.
  • Non-exclusive License: Allows multiple licensees to use the product, which can expand market reach but reduce control.
  • Sole License: A hybrid where the licensor and a single licensee both retain usage rights.
  • Cross-License: Typically used between companies to share patents or technology without financial compensation, often to avoid infringement disputes.
  • Brand Licensing: Focuses on leveraging a recognizable brand to sell products, common in entertainment, sports, and fashion sectors.

Each type involves unique strategic considerations depending on the licensor's goals and the product’s market potential.

Who Uses Product Licensing and Why

Product licensing isn’t just for inventors. It’s widely used across industries:

  • Entrepreneurs and inventors: Use it to monetize their creations without starting a business.
  • Established companies: License IP to reduce R&D costs and enter new markets faster.
  • Startups: May license tech from larger companies to avoid development from scratch.
  • Retail brands: Use licensing to expand product lines with minimal investment.
  • Celebrities and influencers: License their names and likenesses to consumer products.

In essence, product licensing is a mutually beneficial strategy that allows licensors to profit from their intellectual property while enabling licensees to gain market-ready innovations.

Why Is Product Licensing Important?

Product licensing offers an ideal balance of risk and reward. This process can enable inventors to earn 20 times their initial investment. It also enables large companies such as Proctor & Gamble to reduce their internal research and development costs while partnering with outside entrepreneurs.

Reasons to Consider Licensing a Product

  • You don't have the resources or the business plan to start a new company or to dedicate time to research and development.
  • You don't know how to get your product into a retail market, or your company isn't large enough to work with major retailers.
  • You have many ideas for inventions but not enough time or savings to produce them.

Benefits of Product Licensing for Licensees

While much focus is placed on benefits for the licensor, licensees also gain significant advantages:

  • Speed to Market: Licensees can skip R&D and begin selling tested concepts.
  • Lower Development Costs: They save on innovation costs by acquiring existing IP.
  • Market Differentiation: Licensed products can provide a competitive edge.
  • Established Demand: Licensing a well-known product or brand can drive instant consumer interest.
  • Flexible Growth: Companies can scale offerings without committing to long-term development.

These benefits make licensing an attractive business development tool for manufacturers, distributors, and retailers.

Reasons to Consider Not Licensing a Product

  • You want to start a business to have total control over your product manufacturing, distribution, and sales.
  • You think you have a good chance of being selected for a crowdsourcing platform such as Edison Nation.
  • You found a company like OXO or Ikea that wants to buy your intellectual property outright. If you can make a reasonable deal, it could be in your best interest to sell instead of license.

Common Mistakes

  • Not producing a product that manufacturers want to license. Not every product is ideal for licensing. Fewer than 10 percent of inventors successfully license their products. A licensing deal can require extensive negotiating and effort. Also, you may have to invest some of your own money up front to complete your product and make it worthy of licensing. Try pitching your product to retailers to gauge interest before seeking out licensees.
  • Not knowing enough about your market. To license a product, you'll have be persistent and tenacious. You'll have to know your market like the back of your hand, since you'll be working hard to sell it to licensees. You'll also have to understand market demand and know how much risk your product brings. Be prepared to pitch your product and licensing deal professionally, with a multimedia presentation and prototypes if possible.
  • Not knowing enough about the licensee. Always do your research to learn as much as possible before pitching to a licensee. One that already has manufacturing and distribution in place for your category of product could be a good fit. If you know enough, you may be able to tell the company how it can make and distribute your product efficiently.
  • Wanting to keep control over your invention. When you license an invention, you'll have little control over it. Do your research to make sure the manufacturer is reputable. Also ensure the distribution plan is strong before agreeing to a licensing deal.
  • Not protecting your intellectual property. Many inventors seek out a patent before licensing a product, as this gives you the rights to your invention. Many licensees won't work with you if you don't have this level of protection. Take care not to file too early, though. First, find out if you need one. Then complete your idea as much as possible before filing, since you may have to refile if the final version changes the idea too much.
  • Taking "no" for an answer. Product licensing requires extensive negotiation. Be ready to compromise. Remember that there is no standard agreement for licensing. If you want to work with a company, try to find an internal champion who will want to sell colleagues on your product and make the deal happen.
  • Only approaching one licensee. Many inventors receive numerous negative responses before signing a deal. Pitch to several licensees to increase your chances of finding a worthwhile business partner, even if you have one ideal partner in mind.
  • Not having a lawyer review your licensing contract. Like any business contract, licensing deals can be complicated. Have an attorney review or create a licensing agreement to make sure the terms, time frame, and royalties make good business sense. You should also have an attorney review any confidentiality agreements before signing.

How to Find the Right Licensee

Choosing the right licensee is as important as developing a strong product. Consider these factors:

  • Industry Fit: Does the company currently sell similar or complementary products?
  • Distribution Channels: Do they already have access to the retail or commercial market you want to enter?
  • Reputation: Research their track record with past licensing deals and partners.
  • Financial Stability: Ensure they have the resources to bring your product to market.
  • Communication: You’ll need to collaborate—evaluate how responsive and transparent they are.

Building relationships through industry trade shows, licensing expos, or professional associations can help you identify and vet potential partners.

Steps to License a Product

  • Invent an original product. Take the time to sketch it out, create prototypes, and document your invention. You can also develop an improvement for an existing product.
  • Research your market. Before you patent your invention or search for licensees, make sure there is demand for your product. Develop a business plan to make sure you make a smart business decision.
  • Do a patent search. Use the USPTO's online patent database to make sure your idea isn't already patented.
  • Consider filing a provisional patent application. If you need to protect your intellectual property but you haven't perfected your product yet, a provisional patent application could be a smart compromise.
  • File a patent application. Use the USPTO's EFS-Web service to file a patent application online. Work with the patent examiner until your patent is issued.
  • Search for licensees. Seek out licensees in your market and prepare to pitch. You may need to network, place a paid ad, or reach out to several licensees before you find one that's interested. Take the time to build relationships with potential licensees and learn their processes, especially if you intend to license more products in the future.
  • Sign a licensing agreement. Once you have found the right business partner, sign a licensing agreement. Don't hesitate to have your lawyer review it and suggest edits to ensure your rights are protected. Most licensing agreements include the following:
    • Subject Matter: This may be a patent, trademark, copyright, design, or trade secret.
    • Granting of Rights: This defines what you're transferring to the licensee.
    • Licensor's Obligation: This details any assistance or training the licensor will give.
    • Licensee's Obligation: This details financial requirements, guarantees, and confidentiality.
    • License Fee: This refers to the sum that the licensee receives upon signing.
    • Royalty: This specifies the percentage of the wholesale sales that the licensor will receive. Many agreements include a minimum royalty. Most royalties are paid quarterly.
    • Term: This defines the length of the agreement.
    • Designated Area: This describes the limits of the manufacturing and marketing area.
    • Termination: This describes how either party can end the agreement.
    • Guarantees: This includes any warranties or liabilities that the licensee provides.
  • Collect royalties. As your product sells, collect royalties for the duration of the agreement.

Tips for Pitching Your Product

Once you’ve identified potential licensees, presenting your product effectively is key:

  • Create a Sell Sheet: A one-page summary with product images, benefits, and IP status.
  • Develop a Prototype or Video Demo: Show the product in use to build credibility.
  • Tailor Your Pitch: Research each company and customize your proposal accordingly.
  • Highlight Market Potential: Use data to show demand, target audience, and scalability.
  • Be Ready for Questions: Expect inquiries about costs, sourcing, timelines, and modifications.

Persistence is vital—many successful licensors pitch dozens of companies before landing a deal.

Frequently Asked Questions

  1. What is the difference between a license and a patent?
    A patent protects your invention from being copied, while a license is a contract that allows others to use your invention—often for a fee or royalty.
  2. Do I need a prototype before licensing a product?
    Not always, but having a working prototype or a compelling product demonstration significantly improves your chances of success.
  3. Can I license a product without a patent?
    Yes, but it's riskier. Many licensees prefer patented products or at least a provisional patent application to protect the IP.
  4. How much royalty can I earn from licensing a product?
    Typical royalty rates range from 3% to 10% of wholesale revenue, depending on the product type, industry, and your negotiation.
  5. Should I work with a product licensing agent?
    It can be helpful. Agents often have industry contacts and can pitch on your behalf, but be sure to vet them and understand their fee structure.

If you need help with product licensing, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience. They have worked with or on behalf of companies like Google, Menlo Ventures, and Airbnb.